FANG Stocks

What are the FANG stocks?

The term FANG stocks was coined by CNBC’s well-known “Mad Money” host, Jim Cramer, in 2013. It is now widely used by market commentators, analysts and investors.

“FANG” is an acronym that refers to four of the world’s largest and most popular stocks: Facebook (which is now Meta), Amazon, Netflix and Google (which is now Alphabet). In 2017, Apple was added by many Wall Street analysts to this acronym, creating “FAANG.”

What Is FANG?

FANG stocks are all well-known and richly-valued technology companies that have shown extraordinary growth in recent years in both revenues and profits. The 5 FAANG stocks constitute a market cap of over $7 trillion.

Because of their large market caps, and since tech is seen as the cutting-edge sector for U.S. economic growth, the FANG stocks have a huge influence on both the NASDAQ index and the S&P 500, and are seen as an indicator of the health of the stock market as well as the economy.

So if you’re a passive index investor, you have a major exposure to FANG stocks whether you know it or not.

And while their business models do vary, each company has one common trait: the use of advanced technologies, such as artificial intelligence, to acquire and retain users.

These companies are all great beneficiaries of the network effect. This is the concept that the value of a product or service increases as the number of people who use that product or service increases.

Each of these companies has an enormous user-base, which:

  • Generates more value for their products
  • This leads directly to seller services becoming more attractive to third-party merchants
  • All of this, in turn, leads to valuable data analytics and feedback to drive content and services

Bottom line – their extensive network of subscribers, members and users gives these companies an enormous competitive advantage.

Why Invest in FANG?

These companies also share another trait… despite exhibiting growth stock behavior, FANG stocks are less volatile than many stocks. When the stock market rebounds after a dip, it is these stocks leading the charge.

It is this relative stability – along with delivering superior rates of return over many years – that has made these stocks so attractive to investors.

Over the past decade, the FANG stocks have grown faster than the overall S&P 500 or the more tech-focused NASDAQ. These companies have grown to be the top stocks on the S&P 500 through innovation and service diversification, enabling them to weather market changes and recessions.

For example, during the pandemic in 2020, FANG stocks were up 43% compared to the rest of the tech sector that lost around 4%.

That’s why this group of stocks has become a barometer of the investment health of the overall technology sector.

How to Invest in FANG?

To gain exposure to FANG, investors may want to invest in the individual FANG stocks, options, or FANG ETFs.  While most FANG ETFs are not exclusive to FANG stocks, the FANG stocks heavily influence the performance of the fund. And using an ETF may be a less volatile way to gain exposure to these stocks.

For help finding FANG stocks-related investments, make sure you check out the magnifi.com website to help you find the right ETF to meet your investment goals.

Unlock a World of Investing
with a Magnifi Account

START INVESTING TODAY

Magnifi is changing the way we shop for investments, with the world’s first semantic search engine for finance that helps users discover, compare and buy investment products such as ETFs, mutual funds and stocks. Open a Magnifi investment account today.

The information and data are as of the January 17, 2022 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi. 

This material is provided for informational purposes only and should not be construed as individualized investment advice or an offer or solicitation to buy or sell securities tailored to your needs. This information covers investment and market activity, industry or sector trends, or other broad-based economic or market conditions and should not be construed as investment research or advice. Investors are urged to consult with their financial advisors before buying or selling any securities. Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. Past performance is no guarantee of future results. This content may not be reproduced or distributed to any person in whole or in part without the prior written consent of Magnifi. As a technology company, Magnifi provides access to tools and will be compensated for providing such access. Magnifi does not provide broker-dealer or custodial services.


Natural Gas

What Is the Gas Industry? 

Over millions of years, the remains of plants and animals (such as diatoms) built up in thick layers on the earth’s surface and ocean floors. Over time, these layers were buried under sand, silt, and rock. Pressure and heat changed some of this carbon and hydrogen-rich material into coal, some into oil, and some into natural gas.

Specifically focusing on natural gas (the cleanest fossil fuel), its largest component gas is methane, a compound with one carbon atom and four hydrogen atoms (CH4). Natural gas also contains smaller amounts of natural gas liquids (NGLs) and non-hydrocarbon gasses, such as carbon dioxide and water vapor.

Natural gas systems include wells, gas gathering and processing facilities, storage, as well as transmission and distribution pipelines. These components are all important aspects of getting natural gas out of the ground and to the end user.

Natural gas systems encompass the following industry segments:

  • Production: Getting raw natural gas from underground formations.
  • Gathering and Processing: This involves stripping out impurities and other hydrocarbons and fluids to produce pipeline grade natural gas that meets specified targets. Pipeline quality natural gas is 95% to 98% methane).
  • Transmission: This encompasses delivering natural gas from the wellhead and processing plants to city gate gas stations and/or industrial end users. Transmission occurs through a vast network of high pressure pipelines. Natural gas storage falls within this sector. Natural gas is typically stored in depleted underground reservoirs, aquifers, and salt caverns.
  • Distribution: Delivery of natural gas from the major pipelines to the end users.

Why Invest in Gas?

The reason for investing in the natural gas industry is very basic – increasing demand and limited supplies.

In its International Energy Outlook 2021, the U.S. Energy Information Administration (EIA) predicted a nearly 50% increase in global energy use from 2020 to 2050. This is primarily a result of projected economic and population growth in the developing world, particularly in Asia.

Global natural gas demand is forecast to grow by 50% to 5.92 trillion cubic meters by 2050 from 2019 levels, the Gas Exporting Countries Forum said about a year ago in its Global Gas Outlook.

Its forecast for gas demand growth is broadly in line with forecasts from other organizations on an annualized basis. The International Energy Agency (IEA) sees global gas consumption reaching 5.22 trillion cubic meters by 2040. S&P Global Platts Analytics forecast global gas demand at 5.29 trillion cubic meters in the same time frame.

LNG (liquified natural gas) is set for strong growth, as domestic supply in key gas markets will not keep up with demand growth. LNG demand is expected to grow 3.4% a year to 2035, with some 100 million metric tons of additional capacity required to meet both demand growth and decline from existing projects. LNG demand growth will slow, but will still grow by 0.5% from 2035 to 2050, with more than 200 million metric tons of new capacity required by 2050.

All this demand has run smack into a lack of investment in the industry.

Moody’s recently released research in which it found the energy industry will need to increase its capital investments by as much as 54% to avoid a major supply crunch in the coming years. The firm estimated that the $352 billion of industry capital investment during 2021 would need to rise to $542 billion in order to keep pace with new demand.

Moody’s report is consistent with earlier reports by Rystad Energy and Wood MacKenzie estimating the industry has been under-investing since 2015 in the finding and development of new reserves that will be needed to meet rising demand.

How to Invest in Gas

So how can you invest into the natural gas industry and its bullish fundamentals?

Exchange traded funds (ETFs) are one possibility, as is buying a futures contract or investing in natural gas stocks.

There are five natural gas ETFs to choose from currently. Please note that some ETF investments offer exposure to both the oil and gas markets simultaneously.

If you decide to invest in natural gas futures, keep your eyes peeled on Thursdays, when the U.S. Department of Energy releases its weekly natural gas storage report.

Lastly, investors can opt to invest in companies involved in the natural gas market. As with ETFs, many companies that are exploring for or producing natural gas are also focused on oil. It is difficult to find companies that are aimed purely at natural gas.

For help in finding natural gas-related investments, make sure you check out the magnifi.com website.

 

Unlock a World of Investing
with a Magnifi Account

START INVESTING TODAY

Magnifi is changing the way we shop for investments, with the world’s first semantic search engine for finance that helps users discover, compare and buy investment products such as ETFs, mutual funds and stocks. Open a Magnifi investment account today.

The information and data are as of the January 10, 2022 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi. 

This material is provided for informational purposes only and should not be construed as individualized investment advice or an offer or solicitation to buy or sell securities tailored to your needs. This information covers investment and market activity, industry or sector trends, or other broad-based economic or market conditions and should not be construed as investment research or advice. Investors are urged to consult with their financial advisors before buying or selling any securities. Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. Past performance is no guarantee of future results. This content may not be reproduced or distributed to any person in whole or in part without the prior written consent of Magnifi. As a technology company, Magnifi provides access to tools and will be compensated for providing such access. Magnifi does not provide broker-dealer or custodial services.


Oil Industry

Crude oil or petroleum are called fossil fuels because they are mixtures of hydrocarbons that formed from the remains of animals and plants (diatoms) that lived millions of years ago in a marine environment. Over millions of years, the remains of these animals and plants were covered by layers of sand, silt, and rock. Heat and pressure from these layers turned the remains into what we now call petroleum, which means rock oil or oil from the earth.

The vast majority of crude oil is refined and used by the transportation industry to power our cars, trucks, planes, boats, etc.  Crude oil is also used for heating oil, petrochemical feedstocks, waxes, lubricating oils, and asphalt. 

Oil is measured in barrels (bbl).  One barrel is about 100–200 liters (26–53 gallons). According to the U.S. Energy Information Agency (EIA), in 2020, total U.S. petroleum production averaged about 18.375 million barrels per day, of which 11.283 million barrels per day of crude oil was produced.  

What Is the Oil Industry?

After crude oil is removed from the ground, it is sent to a refinery where different parts of the crude oil are separated into usable petroleum-based products. These products include gasoline and distillates. 

There are two benchmarks for oil globally. Here in the U.S., the benchmark is WTI (West Texas Intermediate). It is a light, sweet, high-quality crude that is easy to refine.

The other is Brent crude, which is the benchmark for European, African and Middle Eastern crude oil.

The term “sweet crude” refers to petroleum that has less than 1% sulfur content. Both WTI and Brent crude are lighter, or less dense, compared to other crude oils available. In addition, their sulfur content is well under 1%, making them simpler to refine into products like gasoline. Because of this, they sell for higher prices on commodity markets. 

Why Invest in Oil?

The reason to invest in oil is straightforward – it remains the lifeblood of the global economy. The fossil fuel industry generates an estimated $3.3 trillion in revenue globally every year.

That’s because, to date, there are yet not enough sources of alternative forms of energy to power the global economy.

This is especially important in the light of the forecast from the EIA that global energy demand will rise by 47% over the next thirty years.

In addition, for various reasons, oil companies have NOT invested enough into finding enough oil to meet the world’s energy needs. This spending hit a 15-year low in 2020.

Moody’s estimates that global annual upstream spending needs to increase by as much as 54% to $542 billion to avert the next supply shock.

Another reason to invest in oil over the shorter-term is inflation and possibly stagflation.

Historically, oil and inflation often go hand-in-hand. In the 1970s, skyrocketing oil prices sent inflation soaring. This forced the U.S. Federal Reserve to raise interest rates to nearly 20% to stop inflation.

Oil stocks have historically done well in periods of low economic growth and high inflation (stagflation).

How to Invest in Oil?

There are three main areas in the oil industry in which you can invest. These are: 

  • upstream – this is the business of oil exploration and production (E&P)
  • midstream – this involves the transportation and storage of oil
  • downstream – this includes the refining and marketing of petroleum products 

In the upstream segment – in addition to the E&P companies themselves – there are drilling firms that contract their services to extract the oil and well-servicing companies that conduct construction and maintenance activities on well sites.

These service firms are ‘safer’ than the E&P companies themselves, which are high risk. That’s because E&P firms have high investment capital outflow, extended duration times to locate oil and drill for it. Virtually all cash flow and income statement line items of E&P companies are directly related to oil and gas production.

The midstream segment is often a safer investment. These businesses are focused solely on transporting and storing oil. Midstream companies may include shipping, trucking, railroads, pipelines, and storage tanks. The midstream segment is characterized by high regulation (particularly on pipeline transmission) and low capital risk. 

The downstream businesses are the refineries. These are the companies responsible for removing impurities and converting the oil to products for the general public, such as gasoline, jet fuel, heating oil, and asphalt.

In summary, oil is a vital cog for the well-being of the global population and a necessity for economic progress. It is also essential to our daily lives. We’re reliant on oil to power our cars and trucks and so many other necessary things.

A good way to invest in the industry is through exchange traded funds (ETFs). A number of which can be found on Magnifi.

Unlock a World of Investing
with a Magnifi Account

START INVESTING TODAY

Magnifi is changing the way we shop for investments, with the world’s first semantic search engine for finance that helps users discover, compare and buy investment products such as ETFs, mutual funds and stocks. Open a Magnifi investment account today.

The information and data are as of the January 7, 2022 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi. 

This material is provided for informational purposes only and should not be construed as individualized investment advice or an offer or solicitation to buy or sell securities tailored to your needs. This information covers investment and market activity, industry or sector trends, or other broad-based economic or market conditions and should not be construed as investment research or advice. Investors are urged to consult with their financial advisors before buying or selling any securities. Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. Past performance is no guarantee of future results. This content may not be reproduced or distributed to any person in whole or in part without the prior written consent of Magnifi. As a technology company, Magnifi provides access to tools and will be compensated for providing such access. Magnifi does not provide broker-dealer or custodial services.


Governance and Transparency

More and more investors – both institutional and retail – are applying environmental, social, and governance (ESG) criteria to their evaluation of the companies they invest in.

Governance, or this case corporate governance, is the system by which businesses are directed and controlled. It involves both the board of directors and management.

Corporate governance covers the areas of environmental awareness, ethical behavior, corporate strategy, and risk management. 

What Is Governance and Transparency?

The core principles of corporate governance include accountability, fairness, responsibility, and transparency. Each of these four principles are essential parts of good governance.

Perhaps the most important of these principles is transparency. Shareholders (and even outsiders) should be informed about the company’s activities, what it plans to do in the future and any risks involved in its business strategies.

Transparency means openness, a willingness by the company to provide clear information to shareholders and other stakeholders. 

Disclosure of material financial matters concerning the organization’s performance and activities should be timely and accurate. This will ensure that all interested parties have access to clear, factual information which accurately reflects the financial, social and environmental position of the organization. 

Transparency ensures that stakeholders can have confidence in the decision-making and management processes of a company.

After the Enron scandal in 2001, transparency is no longer just an option, but a legal requirement that a company has to comply with.

Transparency is a necessity for the whole company. However, its presence is even more important at the top where strategies are planned and all the major decisions are made. Shareholders expect that the corporate board and upper management are open about their actions; otherwise, distrust will form and the stock price will likely suffer.

Why Is Governance and Transparency Important to Investors?

The reasons governance and transparency are important are self-evident.

Poor corporate governance can cast doubt on a company’s operations and its ultimate future profitability. In fact, S&P Global research on governance factors has shown that companies that rank well below average on good governance characteristics are highly prone to mismanagement and risk their ability to capitalize on business opportunities over time.

And there are studies that show a positive link between financial performance and strong corporate ESG policies and practices.

Aaron Yoon, an assistant professor of accounting information and management at Kellogg and George Serafeim at Harvard Business School, recently examined this question by analyzing data on more than 3,000 companies. They found that stock value did tend to rise after positive ESG news about a firm emerged, but only if the news was financially material—that is, related directly to the company’s sector.

The researchers also looked at what categories of ESG news elicited the biggest reaction from investors, given that ESG covers a huge range of company activities. 

In looking at both material and nonmaterial news, they found that investors didn’t respond to every piece of ESG news. But they did react strongly to news about how products affected customers, such as changes in safety, affordability, or consumer privacy. So, if companies are looking for a positive market response, it might make sense for them to invest more resources in those areas. Improving labor practices and lowering products’ environmental footprints also were linked to bumps in stock prices.

That’s why understanding in particular the “G” in ESG is critical, as governance risks and opportunities will likely increase in the future as social, political, and cultural attitudes continue to evolve.

How to Invest in Transparent Companies With Good Corporate Governance

More and more investors are seeing the connection between ESG performance, value creation, and risk reduction. It makes sense that companies with strong ESG performance tend to be more efficient and less wasteful. They enjoy greater employee commitment and higher productivity. And they are more respected and better able to build brand equity. All of that reduces operational and reputational risks.

But of course, ESG investing covers a lot of ground, including governance and transparency.

Investing in such a broad theme can be challenging for investors, even professionals. Fortunately for individual investors, a search on Magnifi suggests that there are a number of ETFs and mutual funds that can help you access this rapidly growing style of investing.

Unlock a World of Investing
with a Magnifi Account

START INVESTING TODAY

Magnifi is changing the way we shop for investments, with the world’s first semantic search engine for finance that helps users discover, compare and buy investment products such as ETFs, mutual funds and stocks. Open a Magnifi investment account today.

The information and data are as of the December 22, 2021 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi. 

This material is provided for informational purposes only and should not be construed as individualized investment advice or an offer or solicitation to buy or sell securities tailored to your needs. This information covers investment and market activity, industry or sector trends, or other broad-based economic or market conditions and should not be construed as investment research or advice. Investors are urged to consult with their financial advisors before buying or selling any securities. Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. Past performance is no guarantee of future results. This content may not be reproduced or distributed to any person in whole or in part without the prior written consent of Magnifi. As a technology company, Magnifi provides access to tools and will be compensated for providing such access. Magnifi does not provide broker-dealer or custodial services.


downside-markets

Downside Protection

What Is Downside Protection?

No one wants to lose money on their investments, right? 

After all, the whole purpose of investing is to build wealth in order to reach your financial goals – an early retirement, a college fund for your children, etc.

Achieving those goals is made a lot tougher with a substantial loss. For example, you would need a return of 100% in order to recoup a loss of 50%.

That’s why both individual and professional investors use various strategies to protect against losses. 

All of these strategies can be called by the broad term ‘downside protection’ and may include the use of stop-loss orders, options contracts, or the buying of other assets that will hedge the risk of the underlying asset already owned.

Diversifying your portfolio is another, very broad-based way to provide downside protection on your total portfolio. As is lowering the percentage in your portfolio of volatile assets.

Why Is Downside Protection Important?

The pandemic-induced stock market selloff in March 2020 was just the latest example of why downside protection is important.

As with any insurance policy, a downside protection strategy is one of those things investors’ may not need… until they do. The whole point is to have the strategy in place before the unexpected happens, before the potentially catastrophic event occurs.

In other words, goal-oriented investors should place more emphasis on playing defense and minimizing drawdowns to their portfolio.

Let’s go back to the Great Recession. The S&P 500 fell 57.7% from its high in October 2007 before bottoming out in March 2009. The decline was the largest drop in the S&P index since World War II.

That type of decline would take a gain of about 125% just to get back to breakeven. That would be difficult if you are in or near retirement.

Examples of Downside Protection Strategies

Here are some examples of downside protection strategies:

Hedging is the most straightforward type of downside protection. Imagine you own 100 shares of XYZ company stock, which is trading for $33 per share. You can hedge your investment by purchasing one put option for 100 shares of the stock. Put options are contracts giving you the right to sell the stock at a guaranteed “strike price” for a limited period of time. Let’s say you bought a put option to protect your XYZ stock with a strike price of $30 per share. If the market price drops below $30, you can still sell your shares for $30 until the day the put option contract expires. If the price goes up, you let the option expire and all you lose is the premium you paid to buy the put option.

Another strategy for investing with downside protection is to write a covered call option. This means you write, or sell, a call option contract with a strike price that’s higher than the current market price. The purchaser of the call contract has the right to buy the shares from you at the strike price. If the price declines or does not go up to the strike price before the option expires, you keep the premium the purchaser paid. The premium provides some downside protection by offsetting part of any drop in the stock price. One negative feature of covered calls as downside protection is that you give up the possibility of making more money if the stock price goes above the strike price – you will lose the stock to the buyer of the call.

If you do not wish to use options, here are some other possibilities to consider:

  • Traditional diversification – Treasury bonds and notes, real estate investment trusts (REITs) funds, precious metals.
  • Riskier Hedges – managed futures, alternative assets 

How Can You Manage Risk?

Each individual is different, with widely varying risk tolerance and views on what is risk. So it is a challenge to select the “right” approach to downside protection. 

This challenge has been significantly more difficult in bullish market environments, as there is a temptation for investors to ignore downside risk in favor of capturing the seemingly endless upside for stocks. However, prudent investors are always prepared for the inevitable bear market.

There are several ETFs and mutual funds that downside protection strategies.  A simple search on Magnifi indicates numerous ways for investors to access these funds with low fees. 

Unlock a World of Investing
with a Magnifi Account

START INVESTING TODAY

Magnifi is changing the way we shop for investments, with the world’s first semantic search engine for finance that helps users discover, compare and buy investment products such as ETFs, mutual funds and stocks. Open a Magnifi investment account today.

The information and data are as of the December 22, 2021 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi. 

This material is provided for informational purposes only and should not be construed as individualized investment advice or an offer or solicitation to buy or sell securities tailored to your needs. This information covers investment and market activity, industry or sector trends, or other broad-based economic or market conditions and should not be construed as investment research or advice. Investors are urged to consult with their financial advisors before buying or selling any securities. Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. Past performance is no guarantee of future results. This content may not be reproduced or distributed to any person in whole or in part without the prior written consent of Magnifi. As a technology company, Magnifi provides access to tools and will be compensated for providing such access. Magnifi does not provide broker-dealer or custodial services.


Quality Investments

What Is a Quality Investing?

Quality investing is an investment strategy based on a set of fundamental characteristics, such as a strong balance sheet, that is used to find the highest quality companies.

Warren Buffett’s mentor – Benjamin Graham – is considered to be the father of value investing. But he was also interested in quality investing.

Graham placed great emphasis on finding quality value stocks. His studies found that the biggest danger when buying value stocks was settling for low quality companies that were unable to compete.

Graham argued that finding quality stocks was the key to successful value investing. In other words, investors in general – but especially traditional value investors – leave money on the table when they ignore the quality dimension of value investing.

The characteristics of a quality company include: strong balance sheet (low debt levels), credible management, earnings stability, payment of dividends and operating efficiency. These companies have high profitability. High rates of return – particularly return on equity, cash flow generation and the profit margins of the business (which measure the ability of the company to generate profits from its assets) are found in quality companies.

There are also other two traits: the company has what Buffett described as an “economic moat,” giving it a competitive advantage over its rivals and a long enterprise life cycle, which means a company is investing in new technologies and products.

Why Is Quality Investing Important?

Quality investing is important simply from the fact that backtesting has shown that “boring” dividend-paying, stable companies have outperformed more risky investments for long periods of time.

Overall, quality stocks have outperformed both value and growth stocks since MSCI began tracking it in global markets in 2001.

An analysis done by the UK’s SN Financial Services comparing the MSCI World Quality index versus the MSCI World Value index was quite illuminating.

It found that from December 31, 1998 to December 1, 2020 quality outperformed value over the long term, +515.77% to +254.87%. Most of the outperformance came mainly from 2008 onwards (post-Financial Crisis).

This makes sense since a quality company is one that generates a lot of cash and reinvests it wisely so that it can defend and grow its competitive advantage.

What’s the Difference Between Quality Investing and Value Investing?

Many retail investors still confuse quality investing with value investing. But they shouldn’t.

Buying high quality assets without paying premium prices is just as much ‘value investing’ as is buying average quality assets at discount prices.

Quality companies have a high return on equity, low debt, and very stable earnings. And they are often among the most familiar names to investors.

These companies generate a return premium in excess of the market over time with lower risk. This return is accentuated when risk aversion is high or rising. Historically, many of these periods have often been associated with value strategies underperforming.

In addition, quality companies are able to sustain elevated profitability levels relative to the wider market for protracted periods. In contrast, investors actually tend to overpay for “growth”, getting sucked into glamour trades.

This leads directly to the outperformance of the “slow and steady” companies where strong fundamentals are not fully priced.

Quality investing also leads to a portfolio with lower volatility than the market. 

Meanwhile, value stocks are simply perceived as being undervalued and investors buy a value stock for what they think to be less than its true worth.

However, value stocks are often cheap for very good reasons, such as poor management and a lack of innovation in a low-growth industry.

That’s why – as shown earlier – quality investing outperforms value investing over longer periods of time.

How to Participate in Quality Investing?

It is rather easy for you to be able to participate in quality investing.

Of course, you could buy individual stocks – the familiar names we all know. Many of them are members of the Dividend Aristocrats, which are S&P 500 companies that have paid and increased their dividend payments for at least 25 consecutive years.

However, an easier and more diversified approach is to invest in ETFs and mutual funds that focus on quality investing strategies.  A simple search on Magnifi indicates numerous ways for investors to access these funds with low fees. 

Unlock a World of Investing
with a Magnifi Account

START INVESTING TODAY

Magnifi is changing the way we shop for investments, with the world’s first semantic search engine for finance that helps users discover, compare and buy investment products such as ETFs, mutual funds and stocks. Open a Magnifi investment account today.

The information and data are as of the December 22, 2021 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi. 

This material is provided for informational purposes only and should not be construed as individualized investment advice or an offer or solicitation to buy or sell securities tailored to your needs. This information covers investment and market activity, industry or sector trends, or other broad-based economic or market conditions and should not be construed as investment research or advice. Investors are urged to consult with their financial advisors before buying or selling any securities. Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. Past performance is no guarantee of future results. This content may not be reproduced or distributed to any person in whole or in part without the prior written consent of Magnifi. As a technology company, Magnifi provides access to tools and will be compensated for providing such access. Magnifi does not provide broker-dealer or custodial services.


Hedged Equity

Hedged Equity

What Is a Hedge?

In simple terms, a hedge is an investment that is made with the intention of reducing the risk of a large and adverse price movement in an asset.

Hedging is similar to taking out an insurance policy. And like insurance, there is a cost to hedging. While it reduces potential risk, it also reduces potential gains, since the hedge is usually taken in the opposite direction as the asset being protected.

In the investment world, the most common way to hedge is through derivatives. These are securities that move in correspondence to one or more underlying assets. Derivatives can include options, swaps, futures and forward contracts.

There are many kinds of options and futures contracts that investors are able to hedge against almost any investment, including stocks, fixed income, interest rates, currencies, commodities, and more.

The effectiveness of a derivative hedge is expressed in terms of delta or “hedge ratio.” Delta is the amount the price of a derivative moves per $1 movement in the price of the underlying asset.

The specific hedging strategy, as well as the pricing of hedging instruments, likely depends on the downside risk of the underlying security against which the investor would like to hedge. Generally, the greater the downside risk, the greater the cost of the hedge. Downside risk tends to increase with higher levels of volatility and over time.

For example, if you want to hedge your position in a highly-volatile tech stock, an option which expires after a longer time period and which is linked to this stock will be more expensive than say a short-term option on a consumer staple stock.

Why Is Hedging Important?

Used wisely, hedging your portfolio can become part of your long-term investment strategy. Hedges can be applied and removed as needed, without disturbing your core strategy or long-term goals.

Most importantly, hedging can help provide short-term shelter from adverse market events. This provides you with an alternative to selling in a down market, being forced to take an investment loss and perhaps incurring redemption fees, transaction costs and tax consequences. 

In essence, hedging is recognizing the dangers that come with every investment and choosing to be protected from any untoward event that can impact one’s finances.

As stated previously, hedging strategies have unique risks, costs and consequences of their own (management fees, taxable events, etc.). It is important that you fully understand the strategy you plan to use and read the prospectuses for any investments you intend to use as a hedge.

Examples of Hedging Strategies

There are several common hedging strategies investors use to help mitigate portfolio risk: short selling, buying put options, selling futures contracts (often on a stock index like the S&P 500), trading volatility, and using inverse ETFs.

Inverse ETFs rise in price when the market goes down. Retail investors often use these ETFs because they are less burdensome than the other hedging strategies. No margin, options or futures is needed to buy an inverse ETF.

Another common strategy involves the use of options. An option is an agreement that lets the investor buy or sell a stock at an agreed price (called the strike price) within a specific period of time. 

Let’s say you own a stock. If you purchase a put option, and the stock falls in price, the put option will go up in price – offsetting at least some of the loss in the stock price. 

How to Participate in Hedging Strategies

You’re already using hedges in your everyday life. The aforementioned insurance policies you buy are a hedge against future scenarios. While hedging will not prevent an incident from occurring, it can protect you if something bad happens.

So it makes sense to do the same in your financial life. 

There are several ETFs and mutual funds that use hedging strategies that are designed to reduce risk.  A simple search on Magnifi indicates numerous ways for investors to access these funds with low fees.

Unlock a World of Investing
with a Magnifi Account

START INVESTING TODAY

Magnifi is changing the way we shop for investments, with the world’s first semantic search engine for finance that helps users discover, compare and buy investment products such as ETFs, mutual funds and stocks. Open a Magnifi investment account today.

The information and data are as of the November 18, 2021 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi. 

This material is provided for informational purposes only and should not be construed as individualized investment advice or an offer or solicitation to buy or sell securities tailored to your needs. This information covers investment and market activity, industry or sector trends, or other broad-based economic or market conditions and should not be construed as investment research or advice. Investors are urged to consult with their financial advisors before buying or selling any securities. Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. Past performance is no guarantee of future results. This content may not be reproduced or distributed to any person in whole or in part without the prior written consent of Magnifi. As a technology company, Magnifi provides access to tools and will be compensated for providing such access. Magnifi does not provide broker-dealer or custodial services.


Sustainability

What Is Sustainable Investing?

Sustainability – a company’s ability to create positive environmental and societal impact – is rapidly reshaping the corporate landscape. It is reshaping whole industries and generating new waves of growth.

The staggering scale of the disruption (and opportunities) that will play out over the next few decades are why many company executives right now are strategizing as to how to position their companies for the future in the face of ongoing megatrends, such as climate change.

More and more governments, as well as corporations, are pledging to back a United Nations campaign aiming for net-zero greenhouse gas emissions. This will affect how nearly every company operates.

Just the push to limit global temperature increases to under 2°C—the number one sustainability challenge of our time—will drive a massive transformation of the global economy. It will require investments totaling an estimated $100 trillion to $150 trillion by 2050.

Tomorrow’s best companies will be those that can operate outside of their comfort zone. Why? At its core, sustainability has a lot to do with resiliency. 

Companies must build the capacity to adapt and innovate amid worldwide disruptions. In effect, sustainability requires “unlearning” how industrial society has operated for 150 years, and  charting a new route to reach the same goal of delivering shareholder value.

Going forward, C-suite executives and boards must treat social responsibility and environmental stewardship not as separate functions largely disconnected from strategy, but rather as integral to corporate and business strategy.

Differences Between Sustainable Investing, Socially Responsible Investing, & ESG Investing

Sustainable Investing, Socially Responsible Investing (SRI), and ESG Investing are often used interchangeably. However, these investment approaches are each different.

Sustainability has become a catch-all term for a company’s efforts to “do better” or “do good.”  This investment approach has three basic pillars: economic growth, environmental protection, and social progress. At times, this is referred to as “people, planet, and profits.” In a nutshell, sustainable investing directs capital to companies fighting climate risk and environmental destruction, while also promoting corporate responsibility.

In general, SRI investors encourage corporate practices that are morally grounded and promote environmental stewardship, consumer protection, human rights, and racial/gender diversity. Essentially, for socially responsible investors, morality trumps the bottom line.

ESG investing also focuses on three pillars. Environmental issues, which can include pollution, climate change, extreme weather, carbon management, and use of scarce resources. Social issues, which can include product safety, human rights, worker safety, customer data protection, and diversity and inclusion. Governance issues, which can include factors such as accounting standards compliance, anti-competitive behavior, and a strong ESG management process.

ESG data and metrics are used to gain insights into the success and value of a company’s performance and policies in order to mitigate risk and identify superior risk-adjusted returns. Essentially, the focus of ESG investing is on increasing the bottom line through investments in responsible companies that are being well managed.

Why Choose Sustainable Investing?

This type of investing has become Wall Street’s hottest growth area. 

According to data supplied by The Forum for Sustainable and Responsible Investing, there are nearly $13 trillion invested into some form of socially responsible investing. And according to research conducted by Morgan Stanley in 2019, 85% of individual investors and 95% of millennial investors are interested in sustainable investing.  

Sustainable investing makes a lot of sense, even if your only concern is the return on the money you are investing.

Like the tortoise in the fabled race with the hare, long-term investors are seeing growing evidence that this type of investing can beat traditional methods. For example, in the past few years, companies with higher ESG ratings had higher average return on invested capital, compared to companies with lower ratings, according to MSCI. 

The reason for this outperformance is straightforward and obvious… ESG pushes companies to look beyond the next quarter or even the next three- to five-year business cycle in evaluating risk.

Even the results from the tough first half of 2020 were good. Morningstar said, “an impressive 72% of sustainable equity funds rank in the top halves of their Morningstar categories and all 26 ESG (environmental, social, and governance) index funds have outperformed their conventional index-fund counterparts.”

How to Participate in Sustainable Investing

With the large number of companies touting their sustainability credentials, you would need a ‘scorecard’ to keep track. A much easier route would be to purchase ETFs or mutual funds that invest in companies with specific sustainability goals. A simple search on Magnifi indicates numerous ways for investors to access sustainable funds with low fees.

Unlock a World of Investing
with a Magnifi Account

START INVESTING TODAY

Magnifi is changing the way we shop for investments, with the world’s first semantic search engine for finance that helps users discover, compare and buy investment products such as ETFs, mutual funds and stocks. Open a Magnifi investment account today.

The information and data are as of the November 8, 2021 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi. 

This material is provided for informational purposes only and should not be construed as individualized investment advice or an offer or solicitation to buy or sell securities tailored to your needs. This information covers investment and market activity, industry or sector trends, or other broad-based economic or market conditions and should not be construed as investment research or advice. Investors are urged to consult with their financial advisors before buying or selling any securities. Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. Past performance is no guarantee of future results. This content may not be reproduced or distributed to any person in whole or in part without the prior written consent of Magnifi. As a technology company, Magnifi provides access to tools and will be compensated for providing such access. Magnifi does not provide broker-dealer or custodial services.


inflation

Inflation

Inflation measures how much more expensive a set of goods and services has become over a certain period of time.  In effect, inflation is the decline in purchasing power of a given currency (such as the U.S. dollar).  Inflation is a major concern for investors because of the effects it may have on their investments.

Currently, most central banks – including the U.S. Federal Reserve – consider a 2% inflation to be “healthy”. Anything significantly above or below that level can have an adverse effect on the economy.  Very high rates of inflation mean that unless income increases at the same rate, people are worse off, and this can lead to lower levels of consumer spending and a fall in sales for businesses.  Very low inflation usually signals demand for goods and services is beneath where it should be, and this tends to slow economic growth and depress wages.

Inflation and Your Investments

Inflation can distort purchasing power over time for recipients and payers of fixed interest rates. For example, take a pensioner who receives a fixed 3% yearly increase to their pension. If inflation is higher than 3%, a pensioner’s purchasing power falls. 

If inflation rises 3% every year, a retiree who has enough saved today to spend $50,000 a year would need just over $67,000 a year in 10 years and more than $90,000 per year in 20 years to fund the exact same lifestyle

On the other hand, a borrower who pays a fixed-rate mortgage of 3% would benefit from 3% inflation, because the real interest rate (the nominal rate minus the inflation rate) would be zero. And servicing this debt would be even easier if inflation were higher, as long as the borrower’s income keeps up with inflation. The lender’s real income, of course, suffers. To the extent that inflation is not factored into nominal interest rates, it creates winners and losers when it comes to purchasing power.

How to Protect Your Portfolio in Times of High Inflation

There are certain investments that are more inflation-tolerant than others or rise together with inflation.  Having a well-diversified portfolio can help enhance investment returns and reduce risk during times of high inflation.  Diversification is a risk management strategy in which investors spread their investments across asset classes.  

Stocks

The stock market’s average annual gain of 10% has outpaced inflation over the long run. However, historically, when inflation spikes (defined as when the CPI suffers one-month increases of 0.5% or more for at least three months in a row) it has been a major headwind for stocks. In five of the previous seven such spikes since 1973, the S&P 500 index declined, suffering a median drop of 7.8%.

The ideal stocks to own in an inflationary environment are companies that can pass along higher costs to their customers because of strong demand for their products. An example of this are consumer staples stocks because they offer “necessities” like food to consumers.  Also, companies that have a habit of raising their dividends regularly may allow you to outpace inflation.

Diversify Internationally

Buying international stocks can help to hedge your portfolio against a weaker US dollar.  That’s because there are many major economies around the world that do not fluctuate in tandem with the US markets.  In addition, rising inflation in the US can actually be advantageous for American investors in international companies whose foreign-currency profits get converted into US dollars.

Real Assets

Real assets are physical assets that have an inherent value due to their physical attributes.  Real assets help diversify investment portfolios as they have a relatively low correlation with financial assets, such as stocks and bonds.  Examples of real assets are real estate and commodities.

Property prices and rents charged by landlords typically go up during inflationary periods, making real estate a popular investment if you want to outrun inflation. Over the past 30 years, an index of U.S. real estate investment trusts (REITs) posted larger gains than the S&P 500 in five of the six years when inflation was 3% or higher.

Also, commodities, such as precious metals, often prosper in inflationary times as well. That’s because as the price of goods and services rise, so too does the price of the commodities used to produce those goods and services. 

TIPS

Investing in bonds may seem a counterintuitive way to beat inflation. However, investors can purchase inflation-indexed bonds. In the United States, Treasury Inflation-Protected Securities (TIPS) are a popular option because it is pegged to the government’s Consumer Price Index.

When the Consumer Price Index (CPI) rises, so does the value of a TIPS investment. Not only does the base value increase but, since the interest paid is based on the base value, the amount of the interest payments rises with the base value increase. TIPS can be accessed in a variety of ways. Direct investment can be made through the U.S. Treasury or via a brokerage account. TIPS are also held in some exchange-traded funds (ETFs) and mutual funds.

Investors can gain exposure to domestic and international stocks, REITs, commodities, and TIPS through ETFs and mutual funds. A simple search on Magnifi indicates numerous ways for investors to access an array of funds with low fees.

Unlock a World of Investing
with a Magnifi Account

START INVESTING TODAY

Magnifi is changing the way we shop for investments, with the world’s first semantic search engine for finance that helps users discover, compare and buy investment products such as ETFs, mutual funds and stocks. Open a Magnifi investment account today.

The information and data are as of the October 14, 2021 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi.

This material is provided for informational purposes only and should not be construed as individualized investment advice or an offer or solicitation to buy or sell securities tailored to your needs. This information covers investment and market activity, industry or sector trends, or other broad-based economic or market conditions and should not be construed as investment research or advice. Investors are urged to consult with their financial advisors before buying or selling any securities. Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. Past performance is no guarantee of future results. This content may not be reproduced or distributed to any person in whole or in part without the prior written consent of Magnifi. As a technology company, Magnifi provides access to tools and will be compensated for providing such access. Magnifi does not provide broker-dealer or custodial services.


Value Investing

What Is Value Investing?

Value investing is a strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value. Value investors actively search for companies they think the stock market is underestimating. They believe the market overreacts to both good and bad news, resulting in stock prices that often do not correspond to a company’s long-term fundamentals. 

This market overreaction offers an opportunity to profit by buying stocks at discounted prices.

Warren Buffett is probably the best-known value investor today, but there are many others, such as Jim Rogers. Rogers once said the following: “I just wait until there is money lying in the corner [ignored by Wall Street], and all I have to do is go over there and pick it up.”

Value investors hope, as seasoned market observer Jim Grant said, “…have people agree with you… later.”

Value investors use a number of various metrics to try to find the intrinsic value of a stock. Intrinsic value is a combination of using financial analysis such as studying a company’s financial performance, revenue, earnings, cash flow, and profit as well as fundamental factors, including the company’s brand, business model, target market, and competitive advantage. 

Some metrics used to value a company’s stock include: price-to-earnings, ratio, price-to-book ratio and free cash flow.

The Difference Between Value and Growth Investing

Value investing involves searching for stocks trading below their actual value. Quite often, these involve mature ex-growth industries, such as utilities and banks, as well as cyclical industries such as banking, energy and mining stocks. 

Growth investing is all about finding companies that show above-average revenue and earnings growth potential, such as technology stocks.

In effect, growth investors are looking for a company at $100 a share and that will go to $200, relatively quickly. Meanwhile, value investors are looking for a company trading at $50 a share that will go to $100 within a few years as the market recognizes its true worth. 

Growth investors, unlike value investors, have little interest in current income from their portfolio. Also, growth investors do not mind highly volatile stock prices because they do not need the money until well into the future.

These two investing strategies have waxed and waned in popularity historically.

In 1997, Nobel laureate Eugene Fama pointed out that value stocks had beaten growth stocks over the long term. This “discovery” was followed by the bursting of the tech bubble in 2000, and value stock prices outperformed growth by 16% over the next five years.

However, by 2005 value stocks became overpriced. And as an issue of the Journal of Banking and Finance pointed out – value investing stopped ‘working’ in most developed markets in the last 15 years.

In simple terms, when the markets are greedy, growth investors win and when they are fearful, value investors win.

Why Choose Value Investing?

For long-term investors, it is this very waxing and waning that means value stocks should be part of your portfolio.

Data from 1927 through 2020 showed that small value stocks had a return of 14.3% annually, and large value stocks had a return of 11.8% annually. During the same period, large growth stocks had a return of 10%, and small growth stocks had a return of 9.3%.

From 1927 through 2019, according to the data compiled by Nobel Prize laureate Eugene Fama and Dartmouth professor Kenneth French – over rolling 15-year time periods – value stocks have outperformed growth stocks 93% of the time. However, when looking at year-by-year performance, value outperformed growth just 62% of the time.

Currently, in a rising interest rate and inflationary environment and with growth stocks outperforming in the decade from 2010 to 2020 – value stocks are poised for a period of outperformance over growth again.

The old debate of growth investing vs. value investing will go on and on. However, history tells us that value stocks outperform over time, even if growth stocks steal the daily headlines. 

So if you’re buying individual stocks, stick to fundamental investing principles of Warren Buffett. Or consider buying a broad-based value index fund that takes a lot of the risk out of stocks over the long term.  A simple search on Magnifi indicates numerous ways for investors to access value funds with low fees. 

Unlock a World of Investing
with a Magnifi Account

START INVESTING TODAY

Magnifi is changing the way we shop for investments, with the world’s first semantic search engine for finance that helps users discover, compare and buy investment products such as ETFs, mutual funds and stocks. Open a Magnifi investment account today.

The information and data are as of the November 8, 2021 (publish date) unless otherwise noted and subject to change. This blog is sponsored by Magnifi. 

This material is provided for informational purposes only and should not be construed as individualized investment advice or an offer or solicitation to buy or sell securities tailored to your needs. This information covers investment and market activity, industry or sector trends, or other broad-based economic or market conditions and should not be construed as investment research or advice. Investors are urged to consult with their financial advisors before buying or selling any securities. Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. Past performance is no guarantee of future results. This content may not be reproduced or distributed to any person in whole or in part without the prior written consent of Magnifi. As a technology company, Magnifi provides access to tools and will be compensated for providing such access. Magnifi does not provide broker-dealer or custodial services.